Monday, 6 March 2017

What we can Learn about Economics from Scandinavia

Lately there has been a lot of talk online about how successful the Scandinavian countries are, and their success has been put down to Democratic Socialist policies like a large welfare state, high taxes, and high public spending. We are encouraged to view the example set by Denmark and Sweden as a model for our nation, and indeed there is a lot to learn about economics from the examples they have set. The nature of those lessons, however, may come to many as a surprise.

The Scandinavian countries are successful, but not for the reasons most people think they are. Each of them were already wealthy, egalitarian, equitable and successful nations long before they adopted any socialist policies whatsoever. For most of the 20th century they had more free market economies than the other countries in Europe; and because they largely stayed out the two World Wars they didn't have to waste huge sums of money on weapons, paying forces, and then replacing destroyed infrastructure in the aftermath.

In many ways the Scandinavian nations are still far more free market than the USA, Britain or France are. Their economies are far less regulated, they do not demand occupational licenses to practice in hundreds of professions that require them in some states of The US (in Finland you don't even need a license to practice law, yet people manage to hire competent lawyers and the cost is far lower), it's easier to start a business, to hire people - and fire them, and there is a lot less red tape and forms to fill in. We have certainly not been asked to heed the example of the Nordic countries in these respects, in fact these policies have been fervently opposed by the champions of The Scandinavian Model in Europe and America.

What's more, the Scandinavian countries were all far more successful before they adopted any socialist policies at all. Sweden enjoyed the highest per-capita income growth in the entire world from 1870 to 1950. It was from the 1970s onward that the Scandinavian nations began their experiments in Democratic Socialism and they remained somewhat successful during this period but less so than previously. These nations built their welfare states on the wealth created by free markets; and in so doing began to reverse their success.

All the Scandinavian countries are market economies. Danish Prime Minister Lars Løkke Rasmussen finally got so tired of media claims to the contrary that he exclaimed: "I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy." Sweden, however, did attempt the experiment of centrally planning their economy like The Soviet Union - and with disastrous consequences.

The Case of Sweden

Socialism nearly destroyed Sweden. Swedish government spending rose from a relatively modest 20% of GDP to 50% between 1950 and 1975. Taxes, public debt, and the number of government employees all expanded massively. By the 1980s the destructive effects of the Swedish experiment with socialism was completely apparent to everyone and the government had to attempt to jump-start the economy with a massive expansion of credit which resulted in economic chaos: stock market and real estate bubbles burst, and interest rates were pushed up to 500 percent by the Swedish central bank. By 1990 Sweden had fallen from the fourth place in international income comparisons to twentieth. The decline led to a revolt against the socialist regime. More economically liberal politicians sharply reduced income tax rates, abolished currency controls, deregulated bank lending, privatized several government enterprises, deregulated the retail, telecommunications and airline industries; and implemented deep government spending cuts. Sweden began to recover and is doing a lot better now (as I am sure you have all heard.) But Sweden's recovery was all thanks to free markets - and no thanks to socialism.

Despite Sweden's economic recovery after the mid-1990s it is still poorer than Mississippi, the lowest income state in the USA. A 2009 study by the Swedish Economic Association discovered that the Swedish economy had failed to create any new jobs in the private sector on net between 1950 and 2005. The actual unemployment rate in Sweden is still probably at least three times higher than the official government figures because many Swedes live off government sick benefit and early retirement and are not counted. Thousands of Swedes are paid by the government to participate in "labor market political activities" whose only purpose is to reduce the official unemployment rate. To speed along their recovery, Sweden has been privitising portions of it's healthcare, social security, and education sectors in an effort to heal them up from the incentives entailed in public ownership which always destroys the quality of services while ratcheting up the cost of provision. Private health insurance is booming in Sweden because of the inevitable rationing, shortages and long wait times which their highly socialised healthcare system has lead to. It may seem shocking but in Sweden the government instructed doctors to "prioritize" patients according to their status as future taxpayers. The elderly are at the bottom of that list since they are mostly retired and paying relatively little in taxes while receiving large shares of government services. It's a distressingly callous approach that can only make cool sense from the perspective of planners seeking to minimize expenses out of the public purse which different interests are all angling for. (So much for socialism doing away with competition.)

Sweden's experiment with socialism also destroyed its history of innovation. The great companies that came out of Sweden such Lidl, H&M, Volvo, Saab, AstraZeneca, Electrolux and Ericsson were all founded in Sweden's free market period. After 1970, the establishment of new firms dropped significantly and many enterprises now survive purely on government contracts out of the public pocket rather than by indication that they are producing what consumers actually want. It was during the free market period when Sweden produced Alfred Nobel, inventor of dynamite, Sven Wingquist inventor of the self-aligning ball bearing, Gustaf Dalen who founded the gas company AGA, and Baltazar von Platen, who invented the gas-absorption refrigerator.

The Case of Denmark

Denmark, like the other Scandinavian nations, may have a large welfare state and public sector, but it also has a far freer economy than the US and many other western nations as I have mentioned. Denmark is only one place below America on the Economic Freedom Index and was previously one rank above it. It is the most free market of all the Scandinavian countries.

This does not mean Denmark has found the right balance, having "the best of both worlds" though.

The large welfare state and heaving public sector has lead to poor social consequences in Denmark, not good ones. Only the nation's relatively free market economy has compensating for the fact, as evidenced by the fact that similar policies have worked nowhere outside of Scandinavian countries: neither in Greece, nor France, nor Spain nor anywhere else. This is partly down to the culture of a hard work ethic that the Scandinavian countries have inherited from their history which required their people to survive the harsh climate. Unfortunately, as generations wear on these welfarist policies are warping the very culture that allowed them to work in the short term.

In Denmark more than a quarter of the working-age population (aged 18-66) is on the government dole; for every one hundred persons employed full time, there are about sixty working age on welfare. In many regions less than half of people are employed. More than 1.5 million people live full-time on taxpayer-funded handouts; the other 4 million people in the country have to pay a marginal income tax rate of 55.6% (on incomes of 55,000$ and above), a 25% national sales tax, and a wide variety of other taxes. Danish economist Per Henrik Hansen estimated taxes in Denmark approach 70% of income when all is considered. It has been claimed that Denmark has a more regressive tax system than the US where a far higher percentage of the taxes fall on the rich.

It might come to a surprise to many on the left who are championing the Danish model (such as Bernie Sanders and his supporters) to discover out that many Danish voters are turning out to vote for more free market politicians, and even the Democratic Socialist Party and those further to the left are in agreement that this is a problem. The classic liberal (free market) Venstre Party was in power in a coalition with the Conservative People's Party from 2001 to 2011 and was elected on its own in 2015. They have gained massive support in making free market reforms to the welfare state and are carrying them out right now! The platform has cross-party support.

Denmark is following the example that Sweden has been laying out since the 1990s. They are undergoing massive welfare reforms because they acknowledge their huge welfare state has created massive dependency and started to shift their culture away from personal responsibility and the ancient hard work ethic they had inherited. This calls the final death knell of empiricism for Socialism as an ideology - but how long before the left will heed the sound?

The Real Economic Lesson to be taken from Scandinavia

The real lesson to be taken from Scandinavia is that socialism wrecks economies and culture. It erodes the work ethic of a nation over generations and it takes a long time for free markets to restore them to prosperity afterwards. In Scandinavia, these policies have been a disaster only mitigated by having economies that are relatively unregulated compared to Europe and America.

New Zealand also flirted with all the policies that Bernie Sanders and supporters want to copy from Scandinavia up until the 1990s as well. It didn't do much for them at all. Since the 1990s New Zealand liberalised their economy and have been far more prosperous; Australia are following suit. Hong Kong was poorer than most countries in Africa and has become one of the richest countries in the world per head in a generation thanks to free market policies. Singapore has also proven itself to be a modern economic miracle. None of the countries which adopted socialism, nor any of the highly statist economies in the developing world, have had results that compare to those of Hong Kong or Singapore in the same period - and many of them remain devastated.

Free markets have helped the poor more than anyone else as they take people out of the most abject poverty and dependency at once, giving them control over their own destiny rather than having to rely on unreliable government to hand them alms. Markets also create the wealth necessary to look after those who remain poor, which is why most of the world's poor would rather be poor in a market economy than a highly socialised one with big government.

We can learn from Sweden and Denmark, yes. We can learn that we don't need miles of regulations or occupational licensing in up to 800 professions which drive up the price of services and stop young people from getting jobs. We can learn that when it's easier to start a business, hire and fire people, and to cut through red tape that brings prosperity. We can learn that high taxes and high spending stunt rather than grow an economy. We can learn that well-intentioned welfarist policies do more to foster dependency than to help the poor in the long term. That is the hardest pill to swallow.

What we can learn from Scandinavia is what Sweden and Denmark have already learned from their experiments with socialism. Hopefully we will learn from them without repeating their mistakes.

The main sources for this article are Debunking Utopia by Dr. Nima Sanandaji, and The Problem With Socialism by Tom DiLorenzo, you can get these two books if you want to learn more.

About Me

Hello, and welcome to my blog. I am a freelance economist who specialises in explaining economics 'the dismal science', in a non-academic fashion.
I find these concepts fascinating, beautiful, and elegant but having read widely I confess the coverage has so far been pretty dry. I am trying to remedy this.
As a political economist I make no great claims to originality. Occasionally I offer a new angle, analogy, argument, metaphor or illustration, but my primary virtue is my ability to communicate in full, clearly and in short; what others have already communicated in part, vaguely and at length.
I would like everyone to enjoy seeing the world more clearly as much as I have and I believe economics, the sacred science of human action, has the ability to do that.
Seeing the Unseen, the title given to this blog is after an essay from my favourite writer on economics, Frederic Bastiat, entitled, "That Which is Seen and That Which is Not Seen." He, like me, was largely a sythensizer and populariser who further developed and explicated ideas that were already circulating in economics - but what a gift and a talent he had for both clear writing and thinking.